Why crises challenge traditional credit risk models

Crises accelerate change. Demand can collapse, input costs can rise, supply chains can be disrupted, financing can become more expensive and customers can face unexpected operational difficulties. The impact varies considerably between industries and individual businesses: some are severely affected, while others adapt or benefit from new opportunities.

Temporary measures such as loan extensions, payment deferrals, public support or emergency financing may help a company absorb the initial shock. However, they can also postpone the recognition of financial difficulties. A business may continue paying suppliers while accumulating liabilities or exhausting its liquidity reserves.

Historical accounts and external credit ratings remain valuable, but they describe a situation that may already have changed. The immediate priority is to determine whether the customer can generate and preserve enough cash to meet its obligations over the coming weeks and months.

See also The Credit Analysis for the broader framework of customer risk assessment.

V-shaped and L-shaped crises: why the recovery path matters

Two simplified scenarios help illustrate the relationship between economic recovery and customer credit risk.

These shapes are illustrative rather than predictive. The actual outcome depends on the customer's sector, cost structure, access to finance, cash reserves and ability to adjust operations.

The long tail of defaults: why payment difficulties may appear later

A sharp decline in sales does not necessarily cause an immediate cash shortage. Companies may still collect invoices issued before the downturn, while cost reductions, additional financing or payment deferrals provide temporary relief.

The problem can emerge later: cash receipts decline as the lower level of sales feeds through to accounts receivable, while wages, rent, suppliers, taxes and loan repayments continue or resume. This creates a time lag between the economic shock and its full impact on liquidity.

It is therefore important to monitor both actual receipts and expected future cash flows. Payment patterns are especially valuable: see The Payment Profile for an explanation of how customer payment behaviour supports credit decisions.

How to reassess customer credit risk during a crisis

When conditions change rapidly, relying solely on annual accounts or an external credit rating can leave significant gaps. Financial information providers and credit insurers remain useful, but their assessments may reflect information collected before the disruption. Changes in credit insurance limits can signal concern, although they may also reflect an insurer's portfolio exposure or risk appetite rather than the specific customer's financial position.

Credit managers should combine several complementary sources:

Direct contact with customers can provide timely information, especially when combined with your own accounts receivable data and collection history. For a broader methodology, consult The Credit Analysis and Get Information About Your Clients.

How to evaluate a company's financial resilience

In a crisis, the first objective is often to estimate how long the business can continue meeting its payments under different recovery scenarios. A practical analysis does not necessarily require a complex model, but it must use credible assumptions and distinguish liquidity from accounting profit.

Six inputs for a simplified liquidity forecast

1. Opening available cash and genuinely accessible financing.
2. Expected collections from existing receivables.
3. Forecast new sales and their actual collection dates.
4. Essential operating payments and fixed costs.
5. Loan repayments, deferred liabilities and exceptional payments.
6. Alternative recovery scenarios, including a prolonged downturn.

Build a weekly or monthly forecast over an appropriate horizon and identify the lowest projected cash balance. If available liquidity becomes negative, the business will need additional funding, lower outflows, faster collections or other corrective action.

For example, a customer with substantial receivables may still face a short-term funding gap if those receivables are collected after its main payments fall due. Conversely, strong equity does not guarantee that cash will be available at the right time.

Historical accounts remain relevant for assessing the starting position and financial resilience, especially when analysed alongside recent management figures and cash forecasts. Review Balance Sheet Analysis and Key Balance Sheet Ratios alongside the cash forecast.

Turn the analysis into practical credit decisions

The purpose of credit analysis is to support decisions that protect the supplier without unnecessarily damaging viable customer relationships. Depending on the assessment, the company may:

• Maintain existing payment terms while increasing monitoring frequency.
• Adjust credit limits or request partial advance payments.
• Obtain suitable guarantees or review credit insurance coverage.
• Agree on a documented payment plan or temporary support arrangement.
• Restrict additional exposure when the risk is no longer acceptable.

If temporary support is granted, define the duration, payment schedule, information requirements and consequences of non-compliance. Consider whether banks, shareholders or other suppliers are also contributing to a credible recovery plan. Avoid becoming the only party financing a structurally unsustainable situation.

These decisions should reflect the company's own financial capacity and Credit Management Strategy. For further discussion of accountability, see Credit Risk: Who Decides?.

Building a resilient credit management approach

Effective crisis management should not begin only when customers stop paying. It requires an early-warning process that combines financial information, payment behaviour, direct dialogue and forward-looking scenarios.

Practical priorities for credit managers

• Segment exposures: identify customers with high outstanding balances, concentrated sector exposure or limited financial flexibility.
• Monitor leading indicators: follow overdue trends, disputed invoices, broken payment promises, order cancellations and requests to extend payment terms.
• Refresh risk assessments: review credit limits and payment conditions whenever the customer's situation materially changes.
• Coordinate decisions: involve sales, finance and management in decisions that affect both risk and commercial continuity.
• Prepare scenarios: anticipate a short disruption, a prolonged downturn and a gradual recovery rather than relying on a single forecast.

The central lesson is that creditworthiness is dynamic. A strong balance sheet and a favourable historical rating do not eliminate the risk of a sudden liquidity shortage. Equally, a temporary difficulty does not automatically mean that a long-standing customer has become unviable.

The role of the credit manager is to make timely, informed and proportionate decisions that protect the supplier's cash flow while supporting sustainable business relationships.